ETF Watch: Premise Debuts Fund Of Funds

Exchange-traded fund newcomer rolls out indexed tactical strategy that invests in other ETFs.
Reviewed by: Staff
Edited by: Staff

Premise Capital, an asset manager based in Naperville, Illinois, has rolled out its first ETF, a passively managed fund that invests in other ETFs. The Premise Capital Frontier Advantage Diversified Tactical ETF (TCTL) comes with an expense ratio of 1.06%, of which 0.85% represents fund operating expenses, and is listed on the Bats exchange (which owns

TCTL’s underlying in-house index is based on strategies that Premise has run for clients in separately managed accounts since before the firm launched itself as an independent registered investment advisor in 2012, according to Managing Director Jacob Hutchinson, who notes that the strategy adheres “to generally accepted academic theories on investing.”

“Everything we do is through the advisory lens. We built these models based on actual individual clients on the SMA side,” he added.

Hutchinson says that the firm was in a risk-off position in 2015, and clients were hit with long-term capital gains taxes as a result, something that could have been ameliorated if the strategy had been offered in an ETF wrapper.

TCTL’s underlying index covers 11 core asset classes and uses a trend-following algorithm to determine whether an asset class is experiencing an upward or downward trend. It then applies an allocation model to determine the weightings of individual asset classes, and a risk-adjustment factor to adjust the weighting of equities versus fixed-income securities.

For example, if equities are proven to be in a downward trend, the fund will increase its exposure to fixed-income securities to maintain a more conservative position, according to the prospectus.

Market signals determine when the index adjusts its holdings and their weightings. Hutchinson describes Premise Capital as a tactical manager that doesn’t trade all that frequently, and notes historically TCTL’s strategy has made about six to eight small trades a year based on market signals to shift the weights of its asset classes.

“It’s basically the first and only index-based globally diversified tactical ETF that trades based on necessity,” Hutchinson said of TCTL. The fund also has an annual rebalance in March.

TCTL invests primarily in State Street’s SPDRs ETFs and iShares' ETFs, making sure to invest only in broad-based, cap-weighted and very liquid funds. Hutchinson points out that the portfolio is always optimized on the efficient frontier, with overweights and underweights of asset classes made along that frontier and no heavily concentrated bets made in any particular asset class.

“TCTL tracks an index that uses forward-looking views on individual asset classes to create diversified portfolios that aim to provide an optimal balance of risk and return while limiting the portfolio’s exposure to inadequately compensated risk,” Hutchinson said by way of summing up the ETF’s objective.

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